3 experts share their thoughts on surgery center M&A

The ASC industry is in the midst of an acquisition and affiliation boom, but will it last?

Lawrence Carter and Harry Foard of Global Health Advisors and Hal Katz of Husch Blackwell shared their thoughts on the matter with Becker's ASC Review.

Mr. Carter is a managing partner and Mr. Foard is an investment banking associate at GHA. Mr. Katz is a partner at Husch Blackwell.

Note: Responses have been edited for style.

Question: What do you believe is fueling recent surgery center mergers and acquisitions?

Lawrence Carter and Harry Foard: There are multiple factors driving the recent surgery center M&A activity. The landscape is getting increasingly challenging for independent surgery centers.

First, there is significant downward reimbursement pressure from both insurance companies and public sector payers such as CMS, driven largely [by] insurance consolidation and governmental initiatives to reduce health spending. Large organizations, whether they be national surgical operators or integrated health systems, are able to use their size as leverage against this trend, while independent surgery centers [can't] and receive less favorable payer contracts.

Second, as we continue to see more and more care removed from the traditional hospital setting, there becomes an increased demand for groups that perform tasks previously performed in the hospital – and ASCs are no exception. This creates a favorable market to sell an independent center, and subsequently, more owners are taking advantage of the increased value of their ASCs.

Third, the difficulties of physician recruitment and regulatory burdens fall more harshly on independent centers, so owners are happy to relegate those duties to a larger group and enjoy a liquidity event in the process.

Hal Katz: Surgery centers continue to be a very attractive investment opportunity. In general, this is because of the significant role they play in the delivery of care. Payers view surgery centers as a lower cost option to a hospital. Patients are far less intimated receiving care in a surgery center than in a hospital. Physicians are able to control their schedules and get in and out of a surgery center far easier than a hospital.

Added to those practical business reasons is an increased number of complex procedures migrating to the surgery center setting because of improvements in the standard of care. And if all that wasn't enough to support the trend, CMS recently proposed changes to the Medicare outpatient prospective payment system rule, which will result in site-neutral payments.

Q: Do you believe this level of activity is sustainable or more indicative of a bubble?

LC and HF: We expect to see robust M&A activity continue well into the future, but with some changes to the current state of affairs. As pressure mounts to move care out of hospitals, the demand for ASCs will become increasingly voracious. Meanwhile, more and more physicians are preferring employee status instead of starting and running their own ASC or practice. Considering these two factors, we expect to see a slowdown in M&A activity in terms of volume coupled with higher valuations, a trend very similar to what we've seen in dermatology.

HK: While it won't continue indefinitely, it will likely to continue over the next two to four years. It could go beyond that. depending on how successful payers are in rolling out pay-for-performance and bundled payment opportunities.

Q: How does the increased M&A activity impact new development?

LC and HF: For many of the larger groups, M&A activity makes up the majority of their expansion efforts. In an environment with such cheap capital available, large surgical operators and health systems prefer to acquire centers with an established reputation and case volume at a premium than to underwrite the risks associated with the creation of a new center.

HK: Hospital systems, along with regional and national surgery center operators, are expected to continue the acquisition of existing surgery centers in key markets. In addition, de novo surgery center development will continue with local hospitals attempting to secure their position in an evolving healthcare delivery system, and independent physicians positioning themselves to have greater control of the care they provide and [for] the opportunity to financially benefit down the road in an ultimate sale of the surgery center.

Copyright © 2024 Becker's Healthcare. All Rights Reserved. Privacy Policy. Cookie Policy. Linking and Reprinting Policy.

 

Featured Webinars

Featured Whitepapers

Featured Podcast